How to Choose Between 0% Financing and Cash Back
Sometimes you have the choice between zero/low APR financing or a cash back rebate. So how do you decide between the two?
First of all, in order to qualify for a low APR offer, you generally have to have great credit. If you don't, then it's an easy choice: take the cash rebate!
If you're one of the lucky ones with solid credit, you can arrange your own financing for between 3% and 6% in today's market. What you need to do is figure out the difference in interest rates between the low APR offer and what you can arrange on your own.
If you can arrange financing at 4% interest on your own, then a low APR offer doesn't really look that great, especially if it's not 0% financing. To give you a very general idea of what a cash rebate is worth in relation to comparable interest rates, I've done the calculations on a typical new car costing $25,000 (with state taxes of 5%).
As you can see, a $1,000 cash rebate is equivalent to a 2% difference in interest rates over a 48 month loan and 1.5% over a 60 month loan.
| Cash Rebate | 48 mo | 60 mo |
| $1,000 | 2% | 1.5% |
| $1,500 | 3% | 2.2% |
| $2,000 | 4% | 3.2% |
| $2,500 | 5% | 4% |
| $3,000 | 6% | 5% |
So let's do an example. If you have the choice between 0% financing over 48 months or $1,000 cash back, which one should you take? Again it depends on what kind of financing you can arrange on your own. Let's assume you can get a car loan at 4% over 48 months.
Since the difference between the 0% financing and what you can arrange equals 4%, it makes sense to take the financing deal because a $1,000 rebate is only equal to a difference of 2% interest.
I recommend that you first check your credit score to see what kind of rates you could qualify for. Use this calculator to determine exactly which offer makes better sense for your particular situation.
3 Steps Every Car Buyer Needs to Take to Save Maximum Money
The key to getting the best deal is to gather price or lease bids from as many local dealers as possible. Then shop that best price around until no one can beat it. Here are the steps:Step 1 Get Prices From My Trusted Network
Select the vehicle you're interested in to see if there are local dealers in my network who will provide you with their best upfront price. You will get direct access to an internet sales manager who you can further negotiate with online (no need to visit dealership).Step 2 Get Prices From TrueCar / CarsDirect
TrueCar, and CarsDirect are my top 2 online price quote recommendations. These services show you pre-negotiated prices from dealers closest to you - and the deals are usually pretty decent. But remember, you can still negotiate further.Step 3 Complete my Checklist
Follow this up with my checklist to make sure you squeeze out every last bit of savings.- Gregg Fidan
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid
About The Author
Gregg Fidan is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate
the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.
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